July 9, 2008

A while back I stumbled on this podcast via Phil McKinney of Killer Innovations. Basically, it’s a very fun exercise in thinking creatively and generating different perspectives. We all know the classic saying.

An optimist says:

Awesome!!!11… The glass is half full.

A pessimist says:

Dang. The glass is half empty.

Phil suggests trying to think of different perspectives on this classic saying. My take—look at it from a Bayesian perspective.

The Bayesian optimist says:

Well I expected a full glass, but only got a half full glass

The Bayesian pessimist says:

I didn’t really expect anything at all, but was really surprised to get a glass half full

ooooh… that’s awkward.

btw. My first interpretation was this.

The Economist says:

Obviously, the water is scarce, and we need make the best use of it by determining who we should allocate it to. Of course, I’m economically rational and propose that I should get the glass of water.

Although, I didn’t see him mention it (and maybe it will be in his upcoming book “Free”), there’s something strategically special about free. Simply, it’s as if producer incentives are as they would be in perfect competition.

What do I mean? Let’s take, for example, Google Analytics (a free service offered by Google). We certainly can assume that Google offers the service for free because it indirectly increases the quality of advertising on search results. But offering the service for free has costs (labor, technical support, etc..). Let’s imagine that it wouldn’t take much cost to turn the service into a losing venture for Google.

Now, Google could charge a price for the service. They’ll lose market share, but it would more certainly make the service sustainable. BUT because Google has some market power, we could speculate that the incentives of the developers would be to lower the quality of the product in order to make more money. For instance, if the service charged per minute of use, we might expect the developers will create interfaces that are a bit more complicated and take more time to use. This would normally be tempered in perfect competition (but, hey, we don’t have an infinite set of web analytics producers). Google could pay users to use the service. Obviously, we can expect that would distort incentives such that users would only use the service to get a bit of money.

What’ left? Exactly, free. When offered for free, Google increases market share as much as possible (and increases the utility derived indirectly from search). Consumers consume as much as they want. More importantly, the developers of the service have a huge incentive to decrease the cost of production as much as possible. We might speculate that decreasing costs correlates with increasing quality. For instance, less demand for technical support (a cost) means that the service is of higher quality.

Simply, Google Analytics is competing against themselves! And competing against one’s self looks a whole lot like perfect competition.

Guy is a bit optimistic on outcomes. These kinds of advertisements end up doing much worse in that they create an adverse selection (I’ve actually seen it happen). Experts willing to slum it might apply. Not likely. And certainly, applicants that are honest about not having the specified qualifications will be overshadowed by those who are very skilled at being deceitful. So, in the end, you end up with individuals that aren’t as skilled as you thought, and you don’t even know it.

There is a bright side. Those type of applicants might actually be well matched to those organizations. In other words, deceitfulness, misrepresentation, and overall fronting might actually be valued characteristics (whether the organization realizes it or not).

June 17, 2007

Participants in the blogosphere usually lack an economic incentive. They are not involved in any kind of trade, and most of the time they have little to gain or to lose. If they spread falsehoods, or simply offer their opinion, they do not sacrifice a thing.

I’m not certain I totally agree. Bloggers sacrifice time or attention. They have an opportunity cost and, thus, choose to forgo other opportunities to blog. Most importantly, they forgo making money. I suspect as information increases in accessibility opportunity cost will increase. In other words, individuals will be more selective in what they contribute because there so many other things they could have been doing.

June 11, 2007

This is Josh Hendrickson commenting on Jennifer Pate Offenberg’s article about gift cards in the Journal of Economic Perspectives.

Essentially, this welfare loss arises from the stigma of giving cash. I have always been fascinated with the fact that giving cash is viewed as inappropriate, yet gift cards are somehow more acceptable. The gift card, as Offenberg points out, is simply a cash gift with a restriction on where the gift can be spent.

An explanation of the aforementioned observation occurred to me while currently reading “The Myth of the Rational Voter” by Bryan Caplan. Caplan explains that voters are more willing to make irrational decisions as the cost incurred from the decision decrease. Because voters face practically no cost for believing whatever makes them feel good (rational or not) they are more likely to pick bad policies.

Possibly gift cards are way of gifting the the psychological benefit of irrationality to recipients. Here, enjoy some extra coffee or a book from Borders that you would not normally buy because you act rationally in the market. In addition, the restrictions ensure that the gift card cannot be spent on something more useful (e.g. gas for the car).

June 6, 2007

Recently, MasterCard ran a fairly structured, fill-in-the-blank consumer-created “Priceless” campaign. And even within the structure of the program “we were hard-pressed to find a lot of good ads,” she said.

What incentives do consumers have to create advertising that is effective in generating clicks, leads, sales, or whatever. A payment scheme linked to something measurable (e.g. clicks) would be more effective in inducing a consumer to create something of value.